Investment Commentary – November 12, 2014

Dow – 17,614.90 (11/11/14 close) (all-time high)
S&P 500 – 2,039.68 (11/11/14 close) (all-time high)
10-year Treasury – 2.36% (11/11/14 close)

  • After a strong September jobs report, the October report further confirmed that the summer weakness was probably a blip. The board of labor statistics (BLS) reported that nonfarm payrolls rose by 214,000, and the unemployment rate declined to 5.8% due to an increase in employment and a decrease in the number of unemployed.
  • With 90.5% of S&P 500 companies having reported, S&P 500 operating earnings are on track to be a record $29.67 for the 3rd quarter, representing a 10.2% year-over-year growth and another high in profit margins at 6.9%.
  • The U.S. dollar has risen in value versus other global currencies in 2014, with a particularly strong advance in the past 4 months. The rise could have significant implications for Federal Reserve policy and U.S. economic growth, especially if it helps keep inflation in check. Potential negatives from the dollar’s advance include a reduction in U.S. exports and reduced tourism from outside the U.S. Analysts think the key takeaway is that continued dollar strength likely would amplify the attractiveness of U.S assets to foreign investors, while the adverse influence of weaker global currencies reduces the appeal of non-dollar-denominated investments to U.S. investors. A prolonged period of dollar strength could result in higher interest rates and/or even lower currency values in some countries.
  • Analysts believe that declining oil prices will likely give an overall boost to the U.S. economy
  • Both the Dow and the S&P 500 indexes hit all-time highs yesterday.
  • The Labor Department reports that the average family dedicates some 10% of its budget to fuels of all kinds. The 25% drop in oil prices since last June, then, amounts to what effectively is a spendable income gain of 2.5% and in just a few months, effectively a $373 billion addition to households’ gross spending power. Even if families spend a small portion of this freed-up money, it cannot help but boost the economy. Beyond this consumer effect, lower oil prices also benefit shipping, warehousing, manufacturing, and all the rest of American businesses that are net energy consumers. Taken together, these effects conservatively could add in excess of 1% to the economy’s annual pace of growth.
  • Barring new problems in the Middle East, there is every reason to expect low oil prices to persist. Increased sources Of oil and gas production – from fracking in the U.S., tar sands in Canada, and broadly, from technologies that permit greater recoveries from existing conventional wells – has enabled global oil output to climb by amounts approaching some 50% since 2010, far faster than demand, especially since the world’s economies are expanding only slowly.
  • Analysts continue to like energy master limited partnerships (MLPs). MLPs have experienced tremendous growth in recent years and we expect substantial growth in the coming decade as well. Some estimates call for up to $890 billion in energy infrastructure growth in the coming decade. More pipelines, processing plants, fractionation facilities and export facilities will be needed.
  • Analysts continue to favor large and mega cap stocks.
  • In fixed income analysts continue to like corporate bonds.

 

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Disclosures:
https://www.lordabbett.com/en/perspectives/economicinsights/oil-prices-good-news-by-the-barrel.html
https://www.oppenheimerfunds.com/advisors/article/whats-next-for-the-mlp-investor/will-the-mlp-growth-story-continue
https://www.jpmorganfunds.com/cm/Satellite?pagename=jpmfVanityWrapper&UserFriendlyURL=contentdet_module&smID=1159383786125